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US debt stand-off continues as default nears

Michael JandaUpdated
Mon Oct 07 19:00:00 EST 2013

The US government is only around 10 days from default as Democrats and Republicans remain locked in a stand-off over increasing the debt ceiling. The worries about a default are now starting to overshadow the anger many Americans are already feeling as the country enters its second week with many non-essential public services shut down by the ongoing budget standoff.

Transcript

DAVID MARK: The US government shutdown and debt stand-off appears further from resolution than ever.

Already it's caused the US president Barack Obama to cancel his planned public APEC (Asia Pacific Economic Cooperation) appearance. It's also causing inconvenience and worse for millions of Americans.

In the latest development, the Republican House of Representatives speaker, John Boehner, has explicitly left open the prospect that the nation's debt ceiling may not be raised before the 17th of October deadline.

If there is no deal by then, the US won't be able to borrow any more money.

The Treasury secretary, Jack Lew, says that will mean the government will default on its debts, in turn triggering a probable credit rating downgrade and a possible financial crisis.

Business reporter Michael Janda has more.

MICHAEL JANDA: The US president Barack Obama is supposed to be at the APEC conference in Indonesia.

But it seems most of the leaders gathered there are forgiving his absence, as the president deals with a political stand-off that threatens to drive the US into default.

The president of the Philippines, Benigno Aquino, says that would be disastrous for the global economy.

BENIGNO AQUINO: What happens there affects all of us. And the world economy obviously is not in a position to withstand too much shocks at this point in time. We are just recovering.

MICHAEL JANDA: The political battle to end the stalemate has shut down many non-essential US government services, and the country's Treasury secretary, Jack Lew, is focussing on the domestic impact.

JACK LEW: Every day that the government is shut down, it does real harm to the American people. And the American people have been fighting their way out of the worst recession since the Great Depression.

The economy is coming back. They don't need politics in Washington to bring the economy down.

MICHAEL JANDA: Beyond around 800,000 federal public servants stood down on unpaid leave, the shutdown's effects are being felt by Americans and visitors to the country in countless small ways.

Australian Paul Ferris has been living in New York for about a year-and-a-half and was planning a camping trip to a national park last weekend.

PAUL FERRIS: There was a guard working, without being paid, in order to tell us that because the government was shut down, the national park was closed and we weren't allowed to camp there. Despite the fact that we'd booked and reserved and paid for our spot to camp there, that reservation disappeared when the government shut down.

MICHAEL JANDA: Mr Ferris says he hadn't noticed many effects from the shut down until his aborted camping trip.

PAUL FERRIS: I think at this stage it's still at the level of annoyance and frustration, and people just wondering when the politicians, and especially the Republicans, can get their act together and, you know, get the government up and running again.

MICHAEL JANDA: But that doesn't look likely in the next few days, with the Republican House of Representatives speaker, John Boehner, warning that the debt ceiling won't be raised unless the Democrats sit down and negotiate on some of the Republicans' demands.

JOHN BOEHNER: The nation's credit is at risk because of the administration's refusal to sit down and have a conversation.

MICHAEL JANDA: The US only has about 10 more days before it reaches its current debt limit.

And the US Treasury secretary, Jack Lew, says at that point there won't be many options other than defaulting on some debt payments.

JACK LEW: If we run out of cash to pay our bills, there is no option that permits us to pay all of our bills on time which means that a failure of Congress to act would, for the first time, put us in a place where we're defaulting on our obligations as a government.

MICHAEL JANDA: If that happens, it will almost certainly lead to the US government having its credit rating cut, pushing up the future cost of US borrowing, and also potentially triggering another global financial crisis.

But markets aren't panicking yet, and DailyFX currency strategist, Ilya Spivak, says that's because few traders seriously believe the Republicans will allow the US to default.

ILYA SPIVAK: If you cry wolf enough times, people become desensitised. And the markets are not nearly as unnerved as they might have been had this been 2011, when we first saw that S and P (Standard and Poor's) downgrade of the US's credit rating.

MICHAEL JANDA: Mr Spivak's optimism is, in part, based on comments like this from Mr Boehner:

JOHN BOEHNER: My goal here is to have a serious conversation about those things that are driving the deficit and driving the debt up.

MICHAEL JANDA: Ilya Spivak says that means the Republicans may be backing down on their demands that the so-called Obamacare health changes must be wound back.

ILYA SPIVAK: He wants, effectively, to link a deal on a continuing resolution to fund the government through dealing with the larger debt issue, which of course is a major movement away from what has really caused this particular flair up, which was attempting to tie that same thing to defunding the Affordable Care Act.

MICHAEL JANDA: But the last time the US had a debt ceiling close call in 2011, the deal came at the 11th hour, causing a credit rating downgrade from one major ratings agency and share market turmoil.

And there is no sign yet that a deal will be done any sooner this time.